Is Tsodilo Resources (CVE:TSD) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Tsodilo Resources Limited (CVE:TSD) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Tsodilo Resources

How Much Debt Does Tsodilo Resources Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Tsodilo Resources had debt of US$1.84m, up from US$1.49m in one year. And it doesn't have much cash, so its net debt is about the same.

How Strong Is Tsodilo Resources' Balance Sheet?

According to the last reported balance sheet, Tsodilo Resources had liabilities of US$2.80m due within 12 months, and liabilities of US$10.2k due beyond 12 months. Offsetting this, it had US$4.3k in cash and US$33.4k in receivables that were due within 12 months. So its liabilities total US$2.77m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Tsodilo Resources is worth US$9.88m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Tsodilo Resources will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Given its lack of meaningful operating revenue, investors are probably hoping that Tsodilo Resources finds some valuable resources, before it runs out of money.

Caveat Emptor

Over the last twelve months Tsodilo Resources produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$1.9m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$69k in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 4 warning signs we've spotted with Tsodilo Resources .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.